<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-11053
C-TEC CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2093008
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
105 Carnegie Center
Princeton, New Jersey 08540-6215
(Address of principal executive offices)
(Zip Code)
(609) 734-3700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock ($1.00 par value), as of March 31, 1995.
Common Stock 19,005,827
Class B Common Stock 8,439,340
<PAGE>
C-TEC CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations-Quarters Ended March 31,
1995 and 1994
Condensed Consolidated Balance Sheets-
March 31, 1995 and December 31, 1994
Condensed Consolidated Statements of
Cash Flows-Quarters Ended March 31,
1995 and 1994
Notes to Condensed Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition
PART II. Other Information
Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31
1995 1994
<S> <C> <C>
SALES $73,163 $64,924
COSTS & EXPENSES 61,136 52,497
---------- ----------
OPERATING INCOME 12,027 12,427
INTEREST & DIVIDEND INCOME 4,839 350
INTEREST EXPENSE (6,347) (8,250)
GAIN ON SALE OF PENNSYLVANIA
CABLE PROPERTIES - 893
OTHER INCOME, NET 257 347
---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 10,776 5,767
PROVISION FOR INCOME TAXES 2,937 2,500
---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST AND
EQUITY IN UNCONSOLIDATED ENTITIES 7,839 3,267
MINORITY INTEREST IN (INCOME) OF
CONSOLIDATED ENTITIES (35) (26)
EQUITY IN (LOSS) OF UNCONSOLIDATED
ENTITIES (2,602) (237)
---------- ----------
INCOME FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY
CHARGE AND CUMULATIVE EFFECT OF
ACCOUNTING PRINCIPLE CHANGE 5,202 3,004
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF INCOME TAX
PROVISION OF $4 IN 1995
AND $190 IN 1994 15 (189)
---------- ----------
INCOME BEFORE EXTRAORDINARY
CHARGE AND CUMULATIVE EFFECT OF
ACCOUNTING PRINCIPLE CHANGE 5,217 2,815
EXTRAORDINARY CHARGE - DEBT - (2,861)
PREPAYMENT PENALTY
CUMULATIVE EFFECT ON PRIOR YEARS
OF CHANGE IN ACCOUNTING
PRINCIPLE FOR POSTEMPLOYMENT
BENEFITS - ($378)
---------- ----------
NET INCOME (LOSS) $5,217 $(424)
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
March 31
1995 1994
<S> <C> <C>
Earnings (loss) per average common share
Income from continuing operations before
extraordinary charge and cumulative effect
of accounting principle change $.19 $.18
Income (loss) from discontinued operations - (.01)
---------- ----------
Income before extraordinary charge and
cumulative effect of accounting principle
change .19 .17
Extraordinary charge-debt prepayment
penalty - (.17)
Cumulative effect on prior years of change in
accounting principles - (.03)
---------- ----------
Net income (loss) $.19 $(.03)
========== ==========
Average common shares outstanding 27,445,167 16,509,593
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31 December 31
1995 1994
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary cash investments $ 89,661 $178,195
Short term investments 124,700 127,245
Other current assets 58,426 51,749
Deferred income taxes 7,664 7,057
-------- --------
Total current assets 280,451 364,246
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Telephone Plant 406,252 399,330
Cable Plant 199,201 192,879
Mobile Services Plant 2,578 2,456
Other Property, Plant and Equipment 13,455 12,948
-------- --------
Total Property, Plant and Equipment 621,486 607,613
Accumulated Depreciation 275,748 267,185
-------- --------
Net Property, Plant and Equipment 345,738 340,428
-------- --------
INVESTMENTS 100,033 14,569
-------- --------
INTANGIBLE ASSETS, NET 50,391 50,319
-------- --------
DEFERRED CHARGES AND OTHER ASSETS 25,960 22,963
-------- --------
TOTAL ASSETS $802,573 $792,525
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt and preferred stock $ 9,010 $ 9,028
Advance billings & customer deposits 8,857 8,169
Accrued taxes 22,956 21,807
Accrued interest 2,182 5,751
Accrued contract settlements 5,150 5,150
Other current liabilities 48,243 48,978
-------- --------
Total current liabilities 96,398 98,883
-------- --------
</TABLE>
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31 December 31
1995 1994
<S> <C> <C>
LONG-TERM DEBT 279,124 273,376
------- -------
DEFERRED INCOME TAXES AND INVESTMENT
TAX CREDITS 45,772 43,600
------- -------
OTHER DEFERRED CREDITS 27,705 26,995
------- -------
REDEEMABLE PREFERRED STOCK - 257
------- -------
COMMON SHAREHOLDERS' EQUITY:
Common Stock 27,823 27,823
Additional Paid-in Capital 227,031 227,034
Retained Earnings 105,062 99,845
Treasury Stock at cost, 377,842 shares
at March 31, 1995 and December 31, 1994 (5,288) (5,288)
Cumulative translation adjustments (1,054) -
------- -------
Total Common Shareholders' Equity 353,574 349,414
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 802,573 792,525
======= =======
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31
1995 1994
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $11,962 $16,910
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant & Equipment (15,472) (11,905)
Proceeds from sale of Pennsylvania
cable properties - 1,200
Proceeds from redemption of investment in
RTB Stock - 1,141
Reduction of short-term investments 2,545 -
Acquisitions (94,265) -
Other 1,192 806
-------- --------
Net Cash Used in Investing Activities (106,000) (8,758)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Penalty on early retirement of debt - (2,861)
Issuance of Long-Term Debt 8,000 135,143
Redemption of Long-Term Debt (2,271) (149,132)
Net Short-Term Borrowings - 826
Other (225) 216
-------- --------
Net Cash (Used in) Provided by
Financing Activities 5,504 (15,808)
-------- --------
Net Decrease in Cash and Temporary Cash
Investments (88,534) (7,656)
Cash and Temporary Cash Investments at
Beginning of Year 178,195 60,182
-------- --------
Cash and Temporary Cash Investments at
March 31, $89,661 $52,526
======== ========
Supplemental Disclosures of Cash Flow Information
Cash paid during the periods for:
Interest (net of amounts capitalized) $9,917 $10,435
======== ========
Income taxes $5,052 $867
======== ========
</TABLE>
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, except per share amounts)
1. The condensed Consolidated Financial Statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulation of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statement prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. However, in the opinion of the Management of the
Company, the Condensed Consolidated Financial Statements include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial information. The Condensed Consolidated Financial
Statements should be read in conjunction with the financial statements and
notes thereto included in the Company's Form 10-K for the fiscal year ended
December 31, 1994, as amended on April 3, 1995.
2. In 1995, the Company received official notification of final settlement from
the Internal Revenue Service relating to the examination of the Company's
consolidated federal income tax returns for 1989, 1990, and 1991. The most
significant adjustment relates to the disallowance of the claimed amortization
of certain intangible assets. Through March 1995, approximately $25,570 in
amortization of these assets has been deducted for tax purposes. As a result of
this disallowance, taxes payable for prior tax years increased approximately $5
million, net operating loss carryforwards are reduced by approximately $25
million and AMT credits are increased by approximately $5 million.
Additionally, interest ranging from $1-$2 million will be payable. Management
had accrued an amount approximating the financial statement effect of the above
adjustments in prior periods.
3. On September 9, 1994, the Company completed the sale of its cellular
properties, which were part of its Mobile Services business segment, to
Independent Cellular Network, Inc. for approximately $190,500. The Company
received cash of approximately $182,300. The remaining proceeds are subject to
certain holdbacks and escrow agreements of which approximately $6,000 is
included in other current assets and approximately $2,200 is included in other
assets in the accompanying March 31, 1995 and December 31, 1994 consolidated
balance sheets in accordance with the payment terms of the respective
agreements. In December 1994, the Company completed the sale of its telephone
answering service operations and signed a letter of intent relative to the
disposition of its paging operations. The paging disposition is expected to be
completed in 1995 and the Company expects to realized a gain on disposal. Such
gain is not expected to be material. The telephone answering service and paging
operations constituted the remaining portion of the Company's Mobile Services
business segment. Therefore, the Company has accounted for the Mobile Services
operations as discontinued operations. Prior years financial statements have
been restated to reflect the discontinuation of the Mobile Services business
segment and all activity up to the date of disposition has been accounted for as
discontinued operations. Sales of the Mobile Services business segment were
$697, and $2,325 for the three months ended March 31, 1995 and 1994,
respectively.
<PAGE>
4. On January 24, 1995, the Company purchased a forty percent equity position
in Megacable, S.A. De CV ("Megacable"). The aggregate consideration for the
purchase was cash of $84,115, subject to adjustments based on the fourth quarter
1995 exchange rate. The Company accounts for its investment by the equity
method of accounting. Megacable translates its assets and liabilities into U.S.
dollars at the rates in effect at the end of the fiscal period. The Company's
share of the gains or losses that result from this process are shown in the
cumulative translation adjustments account in the shareholders' equity section
of the balance sheet. Megacable translates its revenue and expense accounts
into U.S. dollars at the average exchange rates that prevailed during the
period. Therefore, the U.S. dollar value of these items on the income statement
fluctuates from period to period depending on the value of the dollar against
the peso. The excess cost over the underlying equity in the net assets of
Megacable is approximately $94 million, which excess is being amortized on a
straight-line basis over 15 years. For the quarter ended March 31, 1995, the
Company recorded its proportionate share of losses and amortization of excess
cost over equity in net assets of $2,138. The Company's share of cumulative
foreign currency translation was $1,054 for the quarter ended March 31, 1995.
Summarized information for the financial position and results of operations of
Megacable, Inc. as of and for the three months ended March 31, 1995 is as
follows:
<TABLE>
<S> <C>
Assets $111,245
Liabilities $ 59,552
Stockholders' Equity $ 51,693
Sales $ 5,102
Costs and Expenses 3,925
Foreign Currency Transaction Losses 5,860
Net Loss (3,666)
</TABLE>
5. On January 31, 1995, the Company purchased the assets of Higgins Lake Cable,
Inc. The aggregate consideration for the purchase was cash of approximately
$4,600.
6. The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
March 31,
1995 1994
<S> <C> <C>
Currently payable $3,283 $2,426
Deferred (196) 258
Investment Tax Credits (150) (184)
------ ------
Total provision from continuing operations $2,937 $2,500
Provision from discontinued operations 4 190
------ ------
Total provision for income taxes $2,941 $2,690
====== ======
</TABLE>
<PAGE>
The provision for income taxes is different than the amount computed by applying
the U.S. statutory federal tax rate.
The differences are as follows:
<TABLE>
<CAPTION>
March 31,
1995 1994
<S> <C> <C>
Income before provision for income taxes and
cumulative effect of accounting principle
changes $8,139 $5,504
------ ------
Federal tax provision at statutory rate $2,848 $1,926
Increase (reduction) due to:
State income taxes, net of federal benefit 795 973
Amortization of investment tax credits (150) (184)
Rate differential applied
to reversing timing differences (419) (119)
Estimated nondeductible expenses - 375
Non-deductible goodwill 35 35
Tax-exempt interest - (77)
Equity in unconsolidated entities 198 138
Adjustments to prior years 5 (121)
Deferred tax amortization (486) (482)
Other, net 111 36
------ ------
Provision for income taxes $2,937 $2,500
====== ======
</TABLE>
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
---------- -------------
<S> <C> <C>
Net operating loss carryforwards $ 5,127 $ 4,772
Investment tax credit carryforwards 342 342
Alternative minimum tax credits 12,197 13,014
Regulatory liability - deferred taxes 6,049 6,060
Benefit plans 402 536
Accruals for nonrecurring charges and
contract settlements 3,422 3,366
Reserve for bad debts 640 540
All other 5,151 3,981
-------- --------
Total deferred tax assets 33,330 32,611
-------- --------
Property, plant and equipment (53,301) (51,808)
Intangible assets (4,095) (4,163)
Regulatory asset - state flow-through (4,607) (3,864)
All other (2,489) (2,569)
-------- --------
Total deferred tax liabilities (64,492) (62,404)
-------- --------
Subtotal (31,162) (29,793)
-------- --------
Valuation allowance (5,936) (5,590)
-------- --------
Total deferred taxes $(37,098) $(35,383)
======== ========
</TABLE>
<PAGE>
In the opinion of management, based on the future reversal of existing
taxable temporary differences, primarily depreciation, and its expectations of
future operating results, the Company will more likely than not be able to
realize substantially all of its deferred tax assets.
The net change in the valuation allowance for deferred tax assets during 1995
was an increase of $346.
7. On May 8, 1995, the Company sold its investment in Northeast Networks, Inc.
for cash of $5,007. The Company expects to realize a gain of approximately
$2,600 on the disposal.
8. The Company has ensured payment of an obligation in the amount of $1.4
million for Mercom, Inc., of which the Company owns 43.63% of outstanding
capital stock. In the opinion of management, it is not probable that the
Company will be required to satisfy this contingency.
9. In March 1995, the Company made a $5,000 nonrefundable deposit on its
acquisition of Twin County Trans Video, Inc. The transaction is subject to
regulatory approval and certain other conditions. The transaction is expected to
close in 1995.
10. In March 1995, the Company made a demand loan of $887 to Mercom, Inc., of
which the Company owns 43.63% of outstanding Common Stock. The loan bears
interest at 7.7% at March 31, 1995.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1993.
Results of Operations
C-TEC Corporation and subsidiaries' (the "Company") net income was $5,217,
or $.19 per average common share for the first quarter of 1995 as compared to a
net loss of ($424) or (.05) per average common share, for the same period in
1994. The improvement is primarily due to higher interest and dividend income
of approximately $4,500 resulting from earnings on the proceeds of the Company's
stock rights offering and Cellular disposition in 1994 and lower amortization of
approximately $2,600 primarily due to the expiration of significant Cable Group
noncompete agreement in August 1994. Additionally, in the first quarter of
1994, the Telephone Group incurred a penalty of $2,861 net of income tax
benefits, on the early repayment of long-term debt. These improvements were
offset primarily by the Company's proportionate share of the loss of Megacable,
S.A. de C.V. and amortization of the Company's excess investment over the
underlying equity in the net assets of Megacable, which aggregated approximately
$2,100 for the first quarter of 1995. This loss was largely due to foreign
currency transaction losses incurred by Megacable as a result of devaluation of
the peso during the first quarter of 1995. During the second quarter of 1995,
the peso has been experiencing a recovery in value although there is no
assurance that such recovery will continue.
Sales were $73,163 for the first quarter of 1995 as compared to $64,924 for
the first quarter of 1994, with the primary increases occurring the Long
Distance and Communications Services Groups.
A discussion of operating cash flow (earnings before interest,
depreciation, amortization and taxes) by business segment follows:
Telephone Group
---------------
Sales of the Telephone Group increased approximately $389 for the first
quarter of 1995 as compared to the same period in 1994. The increase is
primarily due to higher local network service revenue, due to approximately 8000
additional access lines over the same period in 1994 and higher interstate
access revenue offset by lower long distance toll revenue due to a decline in
messages.
Operating expenses, excluding depreciation and amortization, were
relatively stable as compared to the same period in 1994 with primary increases
occurring in central office software expenses resulting from the Telephone
Group's network development plans and in materials.
Cable Group
-----------
Sales of the Cable Group increased approximately $732 for the three
months ended March 31, 1995 as compared to the same period in 1994 primarily due
to approximately 13,000 additional subscribers over the same period in
<PAGE>
1994. Pay per view revenue declined slightly over 1994 due to lower events in
1994.
Operating expenses, excluding depreciation and amortization, increased
approximately $1,313, or 9.8% for the first quarter of 1995 as compared to the
same period in 1994 primarily due to higher basic programming costs due to
additional subscribers, rate increases and new channels. Customer Service
expenses increased due to additional positions while general and administrative
costs increased due to higher insurance costs.
Long Distance Group
-------------------
Sales of the Long Distance Group increased approximately $5,400, or
86.7%, for the three months ended March 31, 1995 as compared to the same period
in 1994 primarily due to higher revenues of approximately $2,800 from resale of
AT&T Tariff 12 services to another long distance reseller. The Group's
arrangement for sales of this product is expected to terminate during the second
quarter of 1995. Additional switched business and switched residential sales
resulting principally from increases in customers, account for the majority of
the increase.
Operating expenses, excluding depreciation and amortization increased
$5,164, or 73.7% for the first quarter of 1995 as compared to the same period in
1994, primarily related to expenses associated with the Tariff 12 sales and
higher carrier expense resulting from the increases in switched sales.
Communications Services Group
-----------------------------
Sales of the Communications Services Group increased $1,705, or
42.9%, for the first quarter of 1995 as compared to the same in period in 1994
primarily due to a large premise distribution systems services project for a
hospital.
Operating expenses, excluding depreciation and amortization, increased
$1,867, or 42.4%, for the three months ended March 31, 1995 as compared to the
same period in 1994 primarily due to higher costs of sales resulting from higher
sales volume.
Depreciation and Amortization
-----------------------------
Depreciation and amortization decreased $2,634, primarily due to
decreased amortization of $3,250 associated with the expiration of significant
Cable Group noncompete agreement in August 1994.
Interest and Dividend Income
----------------------------
Interest and dividend income increased $4,489 for the quarter ended
March 31, 1995 as compared to the same period in 1994 primarily as a result of
investment earnings on the proceeds received from the sale of the Company's
Cellular operations in September 1994 and from the Company's stock rights
offering which concluded in December 1994. These transactions, net of the
Company's $84,115 investment in Megacable S.A. de C.V. on January 1995, are
primarily responsible for the average invested balance to be approximately
$243,000 for the first quarter of 1995 as compared to approximately $60,000 for
the first quarter of 1994. The weighted average interest rate has increased
approximately 67% for the majority of the invested portfolio over the same
quarter in 1994. Additionally, contributing to the increase were dividends
received on the Telephone Group's investment in Rural Telephone Bank (RTB) Class
C Stock, which was converted from non-dividend paying RTB Class B
<PAGE>
Stock in connection with the early retirement of certain debt of the Telephone
Group in March 1994.
Income Expense
--------------
Interest expense decreased $1,903 for the three months ended March 31,
1995 as compared to three months ended March 31, 1994 primarily as a result of
the early repayment of the Company's $100,000 Senior Secured Notes in December
1994. The Senior Secured Notes had a stated interest rate of 9.52%
Other
-----
The Company's equity in the loss of unconsolidated entities increased
$2,365 for the first quarter of 1995 as compared to the same period in 1994
primarily due to the Company's share of the loss of Megacable and amortization
of the loss of Megacable and amortization of the excess of the Company's
investment in Megacable over its underlying equity on the net assets of
Megacable which aggregated approximately $2,138. The Company's share of
Megacable's losses were significantly impacted by foreign currency transaction
losses incurred by Megacable as a result of the devaluation of the peso during
the first quarter of 1995. During the second quarter of 1995, the peso has been
experiencing a recovery in value although there is no assurance that such
recovery will continue.
Financial Condition
-------------------
Cash and temporary cash investments decreased and investments
increased as of March 31, 1995 as compared to December 31, 1994, primarily as a
result of the Company's $84,115 investment in Megacable S.A. de C.V. in January
1995.
Other current assets increased primarily as a result of higher inventory
balances at the Telephone and Communications Services Groups due to construction
projects in progress. Additionally, other current assets increased as a result
of the required prepayment by the Telephone Group of its 1995 Pennsylvania Gross
Receipts Tax. The unamortized balance was $1,628 at March 31, 1995. Interest
and dividends receivable, included in other current assets increased $1,444 at
March 31, 1995 over December 31, 1994.
Deferred charges and other assets increased as a result of the regulatory
accounting treatment of deferred state income taxes by the Telephone Group. The
Telephone Group is permitted to recognize only state income taxes actually paid
as a cost of service. Accordingly, a regulatory asset is established for the
tax effect temporary differences expected to be recovered from rate payers when
such taxes are actually paid.
<PAGE>
Liquidity and Capital Resources
<TABLE>
<CAPTION>
March 31 December 31
1995 1994
<S> <C> <C>
Cash and Temporary Cash Investments and
Short-term investments $214,361 $305,440
Working Capital $184,053 $265,363
Long-Term Debt (including current maturities) $288,134 $282,385
<CAPTION>
Three Months Ended March 31,
1995 1994
<S> <C> <C>
Net cash provided by
operating activities $11,962 $16,910
Operating income before depreciation
and amortization (excluding Mobile Services
business segment in 1994) $25,855 $28,888
Investing Activities:
Additions to property, plant and equipment
(excluding Mobile Services business segment
in 1994) $15,472 $9,504
Acquisitions 94,265 -
Total $109,737 $9,504
</TABLE>
The Company remains in a strong liquidity position at March 31, 1995
despite declines in cash, temporary cash investment and short-term investments
and working capital over December 31, 1994 primarily due to the Company's
$84,115 investment in Megacable S.A. de C.V. Long term debt increased primarily
as a result of increase of $8,000 in the Cable Group's Revolving Credit
Agreement over December 31, 1994. This increase is primarily due to the Group's
interest payment on March 1, 1995 for its $150,000 Senior Secured Notes.
The Cable Group anticipates that the outstanding balance of the Revolving
Credit Agreement will decrease only slightly during the remainder of 1995 since
the Group will utilize its cash flow from operations to fund its expanded
capital expenditures program in 1995.
Net cash provided by operating activities represented 77.3% and 177.9% of
additions to property, plant and equipment for the three months ended March 31,
1995 and 1994, respectively. This decline is largely the result of a
significant increase in addition to property, plant and equipment by the
Telephone and Cable Groups compared to the three months ended March 31, 1994.
The increase at the Telephone Group is a result of delays experienced in the
construction schedule in 1994 due to the Telephone Group for 1995 are currently
expected to approximate the 1994 level. The increase at the Cable
<PAGE>
Group's the result of the Group's network upgrades to enable it provide local
telephone service in direct competition with existing telephone companies. The
Cable Group's capital expenditures are currently expected to remain ahead of the
1994 level throughout 1995.
The Company intends to utilize its available cash balance to finance the
pending acquisitions of Twin County Trans Video, Inc. and Buffalo Valley
Telephone Company, to develop full service networks using certain of the
Company's cable television and telephone systems or other platforms such as
leased or overbuilt facilities and for potential acquisitions, joint ventures
and similar strategic investments in the telecommunications industry.
The Company owns 43.63% of the outstanding stock of Mercom, Inc. In April
1995, Mercom, Inc. filed a registration statement with the Securities and
Exchange Commission to register up to 2,393,530 shares of its Common Stock, that
are proposed to be offered and sold to shareholders in a rights offering.
Mercom, Inc. expects to raise approximately $8.5 million in the rights
offering.
Under the terms of the proposed rights offering, Mercom, Inc. will
distribute transferable rights to holders of shares of Common Stock on a record
date to be fixed by the Board of Directors, which date is expected to be the
effective date of the registration statement. The rights will be distributed
pro rata to each shareholder based on the number of shares held on the record
date. Each right will entitle the holder to purchase one share of Common Stock
at a price to be determined by Mercom, Inc. when the rights offering is
commenced. In addition, holders of rights will be entitled to subscribe,
pursuant to an oversubscription privilege, for shares of Common Stock that are
allocated for sale pursuant to the rights offering but are not sold because
rights are not exercised.
C-TEC Corporation has informed the Mercom, Inc. that it intends to exercise
all of the rights it receives in respect to the shares it holds, and that it
intends to subscribe, pursuant to the oversubscription privilege available to
all shareholders, for all other shares of Common Stock being offered.
REGULATORY ISSUES
CABLE TELEVISION CONSUMER PROTECTION
AND COMPETITION ACT
The Company, like other operators of cable television systems, is subject
to regulation at the federal, state and local levels. Many aspects of such
regulation are currently the subject of judicial proceedings and administrative
or legislative proceedings or proposals. On October 5, 1992, Congress passed The
Cable Television Consumer Protection and Competition Act of 1992 (the "Act")
which regulated certain subscriber rates and a number of other matters in the
cable industry, such as mandatory carriage of local broadcast stations and
retransmission consent, and which will increase the administrative costs of
complying with such regulations. The most significant provision of the Act
requires the Federal Communications Commission (the "FCC") to establish rules to
ensure that rates for basic services are reasonable for subscribers in areas
without effective competition as defined in the Act. Few municipalities served
by the Company are subject to effective
<PAGE>
competition. The FCC has delegated the responsibility of regulation of the basic
tier to the applicable franchise authority, provided such authority becomes
certified to regulate by the FCC.
The FCC's initial rules regulating cable television rates were effective
September 1, 1993 and the revised rate regulations were effective May 15, 1994.
All cable television rates except pay-per-view and premium channels are subject
to competitive benchmarks established by the FCC. Under the revised regulation,
cable operators' regulated rates generally must be reduced to 83 percent of
their September 30, 1992 levels adjusted forward by inflation and permitted
external costs. The reduction reflects the 17 percent "competitive differential"
between rates of systems that were and systems that were not subject to
effective competition on September 30, 1992, based on the results of the FCC's
statistical analysis of the data it had collected and evaluated in establishing
the initial benchmark rates. Under both the initial and revised scheme of
benchmark/price cap regulation, once the cable operator has reached the
regulated rate level, its rates remain capped at that level. Future rate
adjustments are permitted based on certain external costs incurred by the cable
operator, inflation and the cost of adding channels. External costs include
programming costs excluding retransmission consent fees prior to October 6,
1994, as well as subscriber related taxes and franchise fees and other franchise
requirements. A system with rates above the benchmarks may utilize a cost-of-
service showing to justify its rates and avoid a rate reduction. Equipment
charges for basic tier services are also subject to roll back to the level
representing the cost of the equipment including a reasonable profit. In cases
where equipment has been included as part of a service tier at no additional
cost, it must be unbundled and a separate charge will be allowed. The FCC in its
revised rate regulation issued additional criteria which addressed whether the
manner in which regulated program services were moved to unregulated a la carte
services enhanced subscriber choice or were an evasion of the FCC's rate
regulation. If the a la carte tier enhanced customer choice and satisfied the
criteria established by the FCC, the tier would be considered unregulated.
Additionally, the FCC issued its going forward rules, effective January 1,
1995. Under the new going forward rules, operators may continue to pass through
the cost of new channels plus a 7.5 percent mark-up. Alternatively, under the
new rules, which generally apply only to cable programming service tiers,
operators have the option of imposing a $0.20 per channel per month mark-up
(limited to $1.20 over the next two years and $1.40 over the next three years)
for new channels. In addition, under the new alternative, operators may pass
through increases in cable programming service costs (from May 15, 1994 through
December 31, 1996) only in an amount not to exceed $0.30 per subscriber per
month. Under the new rules, operators also may add unregulated "new product
tiers," composed of new channels and/or channels that duplicate existing
channels. Operators must choose to make adjustments based on either the new
rules or the old rules for all channel additions after May 14, 1994.
Impact to the Company
In determining the impact of the initial FCC basic rate benchmark rules on
a company's current system revenues, cable companies were permitted, prior to
<PAGE>
September 1, 1993, to restructure their rates and channel offerings as long as
the overall rate per subscriber was not increased. The Company restructured its
rates and channel offerings in 1993 and 1994 to comply with rate regulation and
minimize the negative impact on revenues.
The Company is continuing to evaluate the effect of FCC regulations on its
rates. All existing rates as well as future rate increases for basic cable
service must be approved by the local municipality if it has certified to
regulate basic cable service rates. To date, approximately 49% of the Company's
municipalities have filed to regulate basic cable service rates with 36% of
these municipalities currently certified to regulate basic rates.
In November, 1993 the FCC issued letters of inquiry to the Company and
other cable operators to investigate the way in which regulated program services
were moved to unregulated a la carte offerings and whether these and other
changes were in compliance with the original Act. The Company continues to
believe it is in full compliance with the original Act. However, on December 30,
1994, the FCC issued a Memorandum Opinion and Order which ordered that C-TEC's a
la carte packages in two Michigan communities as they existed on November 17,
1993, are subject to rate regulation as of September 1, 1993, and the channels
composing them must be counted by C-TEC as rate regulated channels for purposes
of rate justification, as of that date. The order also terminated the remaining
14 inquiries regarding other C-TEC Michigan franchises since these franchises
withdrew their complaints and accepted the Company's settlement offer, discussed
below. The Company submitted an application for review of the Memorandum Opinion
and Order with the FCC on January 30, 1995. The Company accrued for the
potential a la carte liability in 1994.
The Company has been challenged on it's existing regulated rate structure
by additional communities in Michigan which were not a part of the FCC's letters
of inquiry and is involved in on going negotiations with these communities. The
Company accrued an amount which represents its best estimate of it's subscriber
refund liability in Michigan in 1994. This amount represents a reduction of the
limited basic rate by $.30 cents per month for each subscriber from December 31,
1994 back to the date of initial regulation. The proposed settlement with the
Michigan communities is an effort to resolve the regulatory issues and avoid
possible extended litigation. Communities representing approximately 75% of the
Company's Michigan subscriber base have accepted the proposed settlement offer
which precludes challenges for various periods extending beyond 1995. The
company has either settled challenges or accrued for anticipated exposures
related to initial rate regulation which was effective September 1993. The FCC
issued new rate regulation guidelines which were effective May 1994. During the
first quarter of 1995, the Company commenced basic rate increase notifications
to all of its Michigan subscribers. The rate increase will be implemented in
April 1995. The increase was in conformity with the settlement agreements
discussed previously and the FCC going forward rules. Five Michigan communities
to date have filed complaints with the FCC relative to the April rate increase.
The Company believes that it is in compliance with the amended rate regulation
provisions; however, there is no assurance that there will not be challenges to
its rates.
The Company's remaining regulated cable systems in New York and New Jersey
are regulated by the respective state regulatory commissions, since such
commissions have certified with the FCC to regulate basic cable service rates on
behalf of all communities in those states. In August, 1994 the State of New
Jersey Board of Public Utilities (the "Board") ruled on the Company's rates
which were in effect prior to May 15, 1994. The Board approved the basic rate
and ruled that the Company's a la carte package should not be considered a
regulated tier. The Board did, however, order a two dollar reduction in the
rate charged for converter rental. In 1994, the Company accrued for a refund
liability back to September 1, 1993. Additionally, the Company has changed its
rate for converter rental for future periods to reflect the Board's decision.
The State of New Jersey has again challenged the Company's rate structure,
including a la carte services, under the revised regulations. The rate structure
in the State of New Jersey changed in April 1995, however, from September 1993
until April 1995 the rate structure had not changed and therefore the Company
believes that it has minimal exposure as a result of this second challenge.
During the first quarter of 1995, the company commenced basic rate increase
notifications to all of its New Jersey and New York subscribers. The rate
increase was implemented in April 1995 and was in conformity with the FCC going
forward rules. The Company continues to believe that its New York and New Jersey
systems are in compliance with the Act. The Company has filed the revised
benchmark forms for these states as required and the regulated cable rates after
May 15, 1994 are below the benchmarks, excluding a la carte channels.
The Company anticipates that certain provisions of the Act that do not
relate to rate regulation, such as the provisions relating to retransmission
consent and customer service standards, will reduce the future operating margins
of the Company.
No assurance can be given at this time that the above matters will not have
a material adverse effect on the Company's business and results of operations in
the future. Also, no assurance can be given as to what other future actions
Congress, the FCC or other regulatory authorities may take or the effects
thereof on the cable industry in general or the Company in particular.
<PAGE>
converter rental for future periods to reflect the Board's decision. The State
of New Jersey has again challenged the Company's rate structure including a la
carte services under the revised regulations. The rate structure in the State of
New Jersey has not changed since September 1, 1993 and therefore the Company
believes that it has minimal exposure as a result of this second challenge. The
Company continues to believe that its New York system is in compliance with the
Act. The Company has filed the revised benchmark forms for these states as
required and the regulated cable rates after May 15, 1994 are below the
benchmarks, excluding a la carte channels.
The Company anticipates that certain provisions of the Act that do not
relate to rate regulation, such as the provisions relating to retransmission
consent and customer service standards, will reduce the future operating margins
of the Company.
No assurance can be given at this time that the above matters will not have
a material adverse effect on the Company's business and results of operations in
the future. Also, no assurance can be given as to what other future actions
Congress, the FCC or other regulatory authorities may take or the effects
thereof on the cable industry in general or the Company in particular.
PENNSYLVANIA PUBLIC UTILITY COMMISSION
The Company's local exchange telephone subsidiary, Commonwealth Telephone
Company ("CTCo"), is subject to a rate-making process regulated by the
Pennsylvania Public Utility Commission. Consequently, the ability of the
Telephone Group to generate increased income is largely dependent on its ability
to increase its subscriber base, obtain higher message volumes and control its
expenses.
During 1993, the Pennsylvania Public Utility Commission ("PPUC"), conducted
a review of CTCo's transactions with affiliates, as well as analyzed the
earnings of CTCo. Among other things, under the terms of an agreement reached
with the PPUC concerning this review, CTCo is providing its residential
customers touch-tone service free of charge beginning February 1, 1994. The
agreement also states that, barring unforeseen regulatory changes, CTCo will not
increase basic service rates prior to January 1, 1997. The Company has not
increased basic rates since 1978. The PPUC has also required the Company to
permit only income taxes actually paid to be recognized as a cost of service.
Accordingly, subsequent to December 31, 1993 the Company does not record
deferred state income taxes on certain temporary differences. These matters are
not expected to have a material effect on the consolidated results of operations
or financial condition of the Company.
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
(27) Financial Data Schedule
(b.) Reports on Form 8-K
The Company filed a Form 8-K on February 8, 1995 to announce the
acquisition of a 40 percent equity position in Megacable, S.A. De
CV for approximately $84 million in cash.
The Company filed a Form 8-K on April 10, 1995 with the required
financial statements and pro forma financial information related to
its acquisition of Megacable, S.A. De CV.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
C-TEC CORPORATION
DATE: May 15, 1995 /s/ Bruce C. Godfrey
----------------------------
Bruce C. Godfrey
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
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